Lab Budgeting and Cost Accounting Under Drgs

Lab budgeting and cost accounting under DRGs

Medical Laboratory Observer, Feb, 1985 by W. Glenn Cannon

Cost accounting is not a solution to management problems. It is a management tool designed to provide information that facilitates sound decisions. The two primary objectives of cost accounting are 1) to match cost with revenue and 2) to match resource consumption with the units of service provided.

Under the DRG system, matching revenue with cost and evaluating appropriate utilization levels must be done on a patient-by-patient or case-by-case basis. These are hospital management functions. Overutilization of services for a patient will drive costs above the level of the fixed payment rate for a particular diagnosis.

Since the cost of a particular test can no longer be matched against a specific dollar amount of revenue, laboratory managers now will have the most significant impact by producing lab services as efficiently as possible in terms of costs. Controlling resource consumption is the lab's prime concern, and the cost/output ratio is the laboratory manager's key performance measurement.

In hospitals, two distinct management components require cost data: individual service centers providing unique aspects of patient care and independent physicians who determine the types and quantity of service the different centers provide.

Each of these centers--nursing, emergency room, radiology, and the laboratory, for example--has a unique set of economic factors affecting its ability to operate efficiently and maintain viability. The department head for each center has control over labor used, supplies consumed, and support services consumed (laundry, housekeeping, etc.), and is expected to absorb some administrative overhead.

Physicians, however, control the center's scheduling function. They do so by ordering tests and other services.

Which patients receive lab services or how much each patient receives is irrelevant to the laboratory manager. But if hospital administrators succeed in reducing test utilization by persuading phsicians to curb unnecessary ordering, the laboratory must react appropriately. That means scaling down operations in a way that results in significant savings.

A mere decrease in the number of tests performed will not cut costs a great deal. For example, it may only shave reagent use and a bit off the electricity bill. Personnel and overhead costs continue at previous levels unless management does something about them.

We will suggest possible methods of reducing laboratory resource consumption, but our main purpose here is to outline a cost accounting system that gives lab managers the best cost data available on the operational components of the laboratory that they can do something about. Data on volume and expenses that the manager cannot control--such as tests ordered by different medical services and allocations for everything from the hospital security force to legal fees--confuse the laboratory performance measurement process and provide excuses for poor performance. to be a useful management tool, the cost accounting system must accurately measure cost per unit of service and determine what resources should have been consumed for the units of service provided. What are the elements of this system?

* It measures production, and some production sttistic must be maintained. We call it a "production measurement unit" (PMU). Depending on the health care service being measured, any of the following can serve as a PMU: the CAP workload recording unit; a similar relative value unit set individually for each hospital department; a patient day; a care plan day, which classifies a patient into one of several levels requiring different degrees of resource consumption (used commonly in nursing); or some time increment, a minute or an hour, say, which could be suitable for surgery.

Each laboratory section will probably have its own set of PMUs. For example, microbiology is heavily manual while chemistry is highly automated, and their outputs cannot be measured in the same manner. In selecting a reasonable PMU, consider the following criteria:

1. It is the single factor that most clearly causes resource consumption to vary. Note that this must relate to consumption--the use of labor and materials, and instrument costs--not to what the laboratory has been charging for a test.

2. It must be measurable and easily understood by laboratory personnel. If the staff cannot understand the PMUs, the system won't be effective.

3. It must be affected only by volume changes.

Laboratories have an advantage over other areas of health care through a long history of using CAP units as a statistical